Thread: Financial Crisis in Dubai: Towards a Nightmare Scenario

Financial Crisis in Dubai: Towards a Nightmare Scenario?


by Mike Whitney
Global Research
November 28, 2009


The default in Dubai is not the beginning of Financial Meltdown 2. Don't look for dominoes here. Yes, it does raise serious questions about the vast debt-overhang in emerging economies--particularly East Europe. But, this is not a "sovereign default" in the strict sense, nor is there any great risk of contagion. Oil-rich Abu Dhabi is loaded with liquid assets, possibly as much as $800 billion. They could pay off Dubai World's measly $60 billion debt without batting an eye. But Abu Dhabi wants to send its wastrel younger brother a wake-up-call by forcing Dubai to restructure its debt. That means that banks, bondholders and contractors will have to take a haircut, which is not surprising given the abysmal condition of the commercial real estate market.

Dubai World owners were caught up in the same heady debt-fueled commercial construction-binge that swept across the United States. The problem can be traced back to lax lending standards and low interest rates. Now demand has fallen off a cliff and credit is getting tighter. Dubai World can't roll over its debt or meet its obligations. That's what typically happens when credit bubbles burst.

On Thursday, Bank of America analysts issued a statement: “One cannot rule out — as a tail-risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s.â€

It goes to show that even if you are oil rich you should not try to expand based on debt.

Topic background article(s):
Dubai Debt Woes Raises Fear of Wider Problem (w/5 other articles):
http://www.alipac.us/ftopicp-986869.html#986869